There’s a Good Business Case for a Retirement Renaissance

According to information, Ford MotorF Co. and the United Auto Workers (UAW) reached a tentative agreement to end a 41-day strike at selected plants. Experts predict the Ford deal could have a domino effect on negotiations with General Motors, GM Co and Stellantis, two other automakers involved in the strike.

It is reported that the agreement shows significant progress in increasing the wages of the workers. According to the UAW, the agreement provides for a 25 percent increase in base wages through April 2028, a more than 30 percent increase in top wages to more than $40 an hour, and a 68 percent increase in starting wages to above $28 an hour. Although the UAW is demanding a 40 percent wage increase, this wage improvement is truly significant and will improve financial security for Ford workers.

The agreement also reportedly includes improvements to retirement benefits for current retirees, employees with pensions and those with 401(k) plans. As the details emerge, it will be important to understand how significant the benefits improvements are, as most US workers struggle when it comes to retirement security. At the outset, the UAW said it wanted to reinstate defined benefit (DB) pension plans for workers hired after 2007, which would certainly be a major victory to ensure workers have a secure retirement after a lifetime of work.

JP Morgan says pensions make good business sense

At this point, it’s indisputable that middle- and low-income workers have a better shot at a secure retirement when they have individual 401(k) savings and a pension supplemented by Social Security—the so-called three-legged retirement stool. It’s also true that retirement benefits play an important role in attracting and retaining employees, which is increasingly important to employers given the chronic labor shortage in the United States.

But beyond these benefits of pensions, some experts argue that it’s a smart business move for companies to keep or reopen their employee pension plans. A recent JP Morgan Asset Management report suggests there is a “collective blind spot” when it comes to the value pensions provide to corporate plan sponsors.

In Pension Defrost: Is It Time to Reopen DB Pension Plans, or At Least Stop Freezing Them?, JP Morgan analysts suggest that pension plans can actually strengthen corporate finances. The report found:

“A well-funded WB offers the most cost-effective mechanism for funding retirement benefits for employees. Running a low-risk, well-funded plan can both reduce corporate leverage and increase profits. Contrary to conventional wisdom, pension surplus is not simply a “trapped asset” on the balance sheet. There are several other mechanisms for sponsors to capture the value of pension surpluses, including re-implementation of benefit calculations for current and future employees.”

Indeed, other studies show that pensions are a more efficient means of funding retirement, offering significant cost advantages over 401(k) defined contribution (DC) plans. A typical retirement account has a 49 percent value advantage over a typical 401(k) DC account, with the cost advantages of combining longevity risk, higher investment returns, and an optimally balanced investment portfolio. So if Ford agreed to increase his 401(k) contribution, imagine how far that investment would have gone if the money was in a double-cost pension plan for his workforce?

The JP Morgan report goes on to analyze what’s holding companies back from reopening pension plans (such as fears about past funding problems) and provides great detail on how the environment has changed so that there are smart business reasons to rethink the pension offering. It concludes that while each company faces a unique situation, the bottom line is that pension plans “provide economic, strategic and social benefits for both employers and plan participants” and that pensions “don’t require sponsors to blindly step out.” they deserve a comprehensive and fair assessment.” .”

It looks like the fight to get Ford workers’ pensions back will have to go another day. But maybe General Motors Co. and is there still a glimmer of hope for Stellantis workers as the UAW continues to negotiate? If not in the auto industry, perhaps other companies with frozen pension plans will take a hard look at the evidence about the wisdom of offering pension plans. Of course, a pension renaissance will not only benefit workers, but also employers and the wider economy.

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